What Is GST?
Goods and Services Tax or GST is a new system of indirect taxation levied on the sale, manufacture and consumption of goods and services at a pan-India level that will be implemented by 1st July, 2017. The main feature of this taxation system is that it encompasses all existing taxes into a single taxation system called GST. This would facilitate a single national unified market in India and mitigate the biggest threat to the current taxation system which is cascading (double taxation).
The basic tenet of GST is to tax every good and service such that the producer at each stage of the value chain can credit for tax paid on his inputs. The GST Bill will impact several sectors of the economy such as the tax structure, tax incidence, tax computation, tax payment, compliance, credit utilization and reporting, leading to a complete overhaul of the current indirect tax system. The new GST law will have a far-reaching impact on practically every aspect of the business operations in India. For instance, the pricing of products and services, supply chain optimization, Information Technology, accounting and tax compliance systems will be positively influenced by GST.
Why GST In India?
The States in India mainly tax goods and not services and the center taxes manufacturing and services but not wholesale retail (except interstate). GST will give a uniform taxation rate across the states and also give concurrent powers to the State and Center with respect to making laws on taxation of goods and services.
GST, replacing 15 taxes (levied by the State and Center), is India’s biggest tax reform since 1991. Over 140 countries have already implemented GST. Though most developed countries use a single GST system, India has decided to adopt a dual GST model to accommodate the Center and the State. The central government has assured the States any revenue losses incurred by the States from the date of introduction of GST shall be compensated for a period of five years.
Impact Of GST In India
- Cascading effect of taxes on Sales tax, excise duty and service tax will be removed with the help of GST. VAT and CST are charged on the sale price plus the excise amount leading to a double taxation or a cascading effect.
- GST stops the loss of revenue by replacing VAT. VAT is similar to GST, though its regulations vary from State to State. The States usually reduce or cut VAT rates to attract more investors though, this generally leads to a loss of revenue for the State and the Center. GST would also ensure a seamless flow of credit in India.
- Ease of transporting goods and services across the Country because of no separate rates across States. At present, no tax credits are accounted for interstate transactions.
- GST will replace the existing set of indirect taxes levied by the central and state governments. The Center levies taxes such as Central Excise, Service Tax, Customs, Countervailing Duty (CVD), Special Additional Duty (SAD) and Central Sales Tax (CST), whereas the State levies Value Added Tax (VAT), octroi tax, entertainment tax, luxury tax, etc. The GST shall incorporate all existing stated taxes under one tax head, except for customs and stamp duties that will be continued to be charged independently (outside the scope of GST). Quite apt for the slogan One tax for one country.
- GST shall adopt a dual model, i.e. GST will be administered by both, the Central and State Governments.
- For any sale within a State, taxes will be charged by the State under State Goods and Service Tax (SGST) and taxes charged by the Center will be under the Central Goods and Service Tax (CGST). This tax will replace Vat, Excise and Sales Tax.
- For Sale outside the State, or from one State to another shall be charged with only one type of tax, the Integrated Goods and Service Tax (IGST) which is collected by the Center. This tax system will replace Central Sales Tax, excise and Sales Tax.
- GST will help prevent unhealthy competition between States. GST will also ensure redistribution of wealth to poorer States from richer States that will help the country’s uneven distribution of wealth.
- Almost all goods and services will be brought under the GST network, except a few like alcohol, petroleum, tobacco, diesel, natural gas etc. This will result in the generation of employment opportunities, higher output and economic boom.
- Transparent and corruption free tax administration, reform that India has desperately needed.
- The tax structure will be easier to understand for the common man by removing the multiple layers of several taxes. The Indian market will be a unified market under GST.
- GST does not apply to goods and services exported out of India, which will encourage exports at a lower cost. Exports lead to an increase in trade receipts earned and this directly contributes to the increase in India’s Gross Domestic Product or GDP (some estimates state an increase of 2%).
Criticisms Of GST
- Critiques argue that one of the drawbacks of GST is that it will cause consumer prices to rise to keep up with the current levels of tax revenue.
- In response, the Government has stated that the Center and State would provide various tax cuts across different brackets to various taxpayers. The problem with these proposed tax cuts is that the tax cut rates would be minimal and the proportion of the population that pays taxes is a rather small portion.
- With the implementation of GST, we would initially face challenges such as higher administrative costs, inflation rate and opposition of States because of loss of autonomy.
- Tax on Services will go up from 14% to 20% which will directly affect the end consumer and his or her purchasing power and saving ability.
- Also, to avail of credit, one must be connected to the GST network online, which small businesses may find difficult to do.
Goods And Services Taxation Network (GSTN)
The Goods and Services Taxation Network is a non-profit organization dedicated to forming a single portal for all the stakeholders concerned (Government, taxpayers, etc.) to collaborate on. Through this portal, the Central Government can track down all transactions made and the taxpayer can avail of several services to return or pay taxes.
GST Tax Slabs
GST consists of a four-tier tax slab structure. The tax slabs have been set at 5%, 12%,18% and 28% for different items. Luxury and demerit goods will be taxed at the rate of 28% plus cess. Daily needs will be taxed at 5%.
GST: Sector-Wise Impact
|Sr. No.||Sector/Industry||Current/Old Rate||GST Rate|
|1||Automobile||30% – 47%||20% – 22%|
|2||Consumer Durables||7% – 30%||NA|
|3||Furnishing and Home Decor||above 20%||NA|
|4||Cement||27% – 32%||18% – 20%|
|5||Entertainment||20% – 24%||18% – 20%|
|6||Media (DTH and Broadcasters)||14% – 21%||18% – 20%|
|7||Textiles and Garments||6% – 7%||NA|
|9||IT and ITeS||14%||18% – 20%|
|11||Banking and Financial Services||14%||18% – 20%|
|12||Airlines||6% – 9%||16% – 18%|
Please Note: Some Industries are missing because rates have not yet been declared for the same
Direct Tax Code (DTC)
It is important to note the Government should also push to replace the Indian Income Tax Act, 1961 with a Direct Tax Code (DTC). This legislation can be pushed by amending all laws relating to income tax, fringe benefit tax, wealth tax, dividend distribution tax, etc. It would be in line with GST, Digital India, One Nation One Tax., etc. bringing the entire nation under a single tax net.
GST In 2017
With the new taxation system ready to be implemented by June this year, we will observe whether GST is a success for our country, and in which sectors as well. With several nations successfully implementing a GST model, it is about time India does the same as well for economic progress, removal of black money and in line with a digital India.
P.S: Don’t forget to share your opinion in the comments section below.